The Defense Security Service, which stopped issuing clearances three weeks ago, claiming a $100 million budget shortfall, said on Tuesday it would resume processing new applications for secret clearances, but would continue to withhold top-secret clearances, along with renewals for either designation.

The move was announced on the eve of a congressional oversight hearing on Wednesday, which looked into chronic funding shortages at the agency, a branch of the Defense Department that clears all private-sector workers for defense, intelligence, and other national-security projects.

The agency, which has a budget of $261.9 million this year and overseas about 800,000 private-sector workers at 11,000 facilities nationwide, says it is overworked and under-funded.

Federal contractors say further delays in issuing security clearances will eventually force them to boost wages to retain a shrinking pool of employees that are already cleared.

"We are encouraged that DSS is trying to do what it can with limited resources," Doug Wagoner, the head of the Information Technology Association of America, an Arlington, Va.-based IT policy group with more than 325 member companies, said in a statement Wednesday.

"That said, no solution can be acceptable short of full restoration of the processing of all industry clearance applications," Wagoner added.

Since April 26, the agency has developed a backlog of some 4,700 security-clearance cases. In 2005, the agency processed more than 140,000 cases.

Each case can take up to two years to process, according to federal contractors.

In a recent ITAA survey, about 80 percent of some 400 federal contractors polled said there had been a "dramatic increase" in federal requirements for top secret classifications for employees since the Sept. 11, 2001, terrorist attacks.

The survey, which was submitted to members of the Committee on Government Reform at Wednesday's hearing, also showed small contractors felt the government's handling of security clearances had recently "gotten worse or not better," according to Wagoner.

Nicholas Karangelen, the president of Trident Systems, a military computer technology firm based in Fairfax, Va., said the moratorium caused panic among small contractors already pressed to meet tight government deadlines.

"We've been working as hard as we can to work with the system,” Karangelen told members of the committee, calling the process a "bureaucratic nightmare." Six to eight months, if that's what it takes, that's what it takes."

"It's difficult for me to understand why it takes 18 months to process a clearance," said William Gunst, a vice president at Anteon International Corporation, an information technology firm also based in Fairfax. "No one has control of this process."